The role of greenfield investment and investment freedom on environmental quality: testing the EKC hypothesis for EU countries

Foreign investments, viewed as a matter of social responsibility, can improve environmental quality in the host country. In addition, although foreign investors promote economic development because they prefer countries where environmental policies are not stringent, they may increase environmental degradation by transferring dirty industries to host countries. However, in EU countries, environmental policies are strictly implemented, and incentives are offered to increase investments in clean sectors. In this context, there is a widespread opinion that greenfield investments will be environmentally friendly thanks to environmental regulations in EU countries. Despite this, no study has been found that analyzes these views empirically. In this study, the effect of greenfield investment and investment freedom on environmental quality in EU countries for the period 2003–2022 is investigated with panel cointegration and long-run estimators within the framework of the EKC hypothesis. According to the results of the study, while greenfield investment increases environmental quality in Italy and Romania, investment freedom increases environmental quality in Belgium, Croatia, Denmark, Italy and Spain. The EU should set a standard in order to attract environmentally friendly foreign investments, taking into account its strategic location and infrastructure.